Should Disney “Cave” To Charter, Maximizing Revenue In Streaming Transition?

The paradigm-changing fight between Disney and Charter could be the first step in the final collapse of the legacy cable bundle, and live sports’ prime position there, at least if Charter follows through on its threats to walk away entirely from the cable business.

But there’s one solution Disney might consider to solve the impasse: “DIS should cave.”

That’s Needham & Co. Sr. Analyst Laura Martin’s suggestion in a note released Thursday. Her reasoning is pretty simple: Disney needs the money, and lots of it, now to deal with all the challenges it faces.

“To maximize ad (revenues), we believe DIS's content must be on all platforms, including MVPDs,” Martin wrote. “More reach has a larger (total addressable market), and higher economics. We think DIS must redesign a new media future with CHTR that maximizes its US revs and creates a moat to protect it against user-generated content, video games, etc.”

For decades, Disney and other media companies, especially those with the magic ward spells seemingly cast by football over U.S. audiences, have been able to extract higher fees from MVPDs while pushing more and more of their good content onto their streaming services.

After years of what analyst Michael Nathanson of MoffettNathanson calls “cheating,” leaking sports and other premier cable/broadcast-only content onto streaming services, Charter finally said it was done playing around. Teacher is calling the student to account.

“We’re on the edge of a precipice,” Charter C.E.O. Chris Winfrey said on a conference call Sept. 1, hours after the impasse first hit. “We’re either moving forward with a new collaborative video model, or we’re moving on. This is not a typical carriage dispute. It’s significant for Charter, and we think it’s even more significant for programmers and the broader video ecosystem.”

As Martin pointed out, Charter says it pays Disney $2.2 billion a year in fees. The No. 2 cable provider also delivers access to a hefty share of U.S. homes, especially in the top two markets of New York City and Los Angeles, that watch all those ads that run on football at premium prices.

“Without CHTR's fees, DIS's (revenues) would fall immediately for 12 months, but its liabilities to sports leagues would not,” Martin wrote. “This would destroy its margins and (returns on invested capital) for at least 12 months. Also, DIS's ad revs would also fall by an additional $1B/year (our estimate) because CHTR reaches 30mm homes and DIS sells 12-14 minutes of ads in each hour of viewing of ABC, FX, and ESPN.”

The impacts should start hitting as the fight trudges into its second week without ABC and ESPN broadcasts of college and NFL football games, the US Open tennis tournament, and much else.

Both sides are sending irate sports fans to virtual MVPD providers (Disney-controlled Hulu + Live TV on one side, Fubo and YouTube TV on the other). If the standoff continues, that move alone may make any quasi-return to the status quo ante impossible. How you going to keep them on the farm when they’ve seen the comparative ease and flexibility of vMVPDs, or the immersive distractions of TikTok and Starfield?

Winfrey has reason to be grumpy. As Nathanson pointed out, ”last NFL season marked the first time fans were able to stream three of the five game packages through SVOD. This upcoming season will see the NFL Sunday Ticket offered a la carte (no Pay TV subscription required) for the first time via YouTube, a first-ever streaming-only playoff game on Peacock and Amazon Prime Video’s new Black Friday game.”

The cheating is only accelerating, Nathanson wrote. But will Disney come around to some version of Charter’s position? Not yet.

DIsney rejected the new “collaborative video model,” which would have given Charter customers free access to ad-supported content on Disney+, Hulu and ESPN+. A week into the fight, Disney issued yet another public missive on the disagreement, saying Charter didn’t care about its bereft customers.

“The question for Charter is clear: Do you care about your subscribers and what they’re telling you they want – or not?” Disney’s Thursday statement emailed to media says.

The answer to that question might just be “or not,” given Charter’s hard line so far. And Charter has been making far more from low-cost mobile service and high-speed broadband for a while now. The margins are far better, and headaches far less, compared to running a cable bundle these days. It has options.

So while Charter’s statements could be a negotiating ploy, Charter is seemingly far more committed to radically revising business models than to keeping football for fans to watch on a fading distribution platform.

Disney has already had consequences from the fight, with share prices dropping 3.2% the past week, to a post-lockdown low of about $81 a share (other Hollywood media companies other than Netflix have also seen big share-price drops).

Wells Fargo analyst Stephen Cahall may have stuck to his “overweight” call on DiS in his note this week, but Cahall also cut the target price for Disney shares by more than 20%, or $36, to $110.

"To us, Disney is the most interesting stock in media: an IP powerhouse down on its luck, at a COVID price and historically low multiple," Cahall wrote. That overweight call was fueled mostly by Cahall’s belief that investors eventually will look past the short-term woes to the company’s longer-term opportunity in a future media universe.

Well, maybe, though the market isn’t known for its long-term view and patience.

In the meantime, things are getting rough at the Mouse House. The last two Pixar movies tanked, and the recent Marvel projects haven’t been well received. Disney and Comcast have accelerated negotiations on Comcast’s one-third stake in Hulu, which means Disney would need to grub up a spare $10 billion to $12 billion to finally solve that headache.

CEO Bob Iger has become a verbal punching bag for striking actors and writers, while the strike itself has killed fall TV shows, production and promotion on pending movies and TV series, and a serious hole in the Disney blockbuster pipeline.

So maybe, amid all that, it’s time for Disney to more fully consider Martin’s advice. Hey, Bob, just cave.